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Cheshire Racing Ltd v Revenue & Customs [2007] UKVAT V20283 (06 August 2007)

20283

Value added tax-partial exemption — satellite information service screens used in bookmakers — whether used for general information in the business or specifically for over the counter betting for horse and greyhound racing- general overhead — appeal allowed

MANCHESTER TRIBUNAL CENTRE

CHESHIRE RACING LIMITED Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: David Porter LLB (Chairman)

Rayna Dean FCA

Sitting in public in Manchester on 5 June 2007

John Grierson of counsel instructed for the Appellant

Jonathan Cannan of counsel, instructed by the Solicitor and General Counsel for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Cheshire Racing Limited ("the Appellant") appeals against the decision of the Commissioners contained in letters dated 7 September and 29 September 2006 refusing repayment of a Voluntary Disclosure that sought repayment of £10,467.25. The Appellant contends that the input tax on the satellite information screens should be allowed for the purposes of calculating their partial exemption claim as there was a direct and immediate link between the costs incurred and the making of taxable supplies. The Commissioners rely on the case of Town and County Factors Limited v Her Majesty's Revenue & Customs (decision 19616) on the basis that there was no content provided by the Appellant in the use of the screens and that there could not therefore be a direct and immediate link.

Jonathan Cannan of counsel appeared on behalf of the Commissioners. John Greison of counsel appeared on behalf of the Appellant which was represented by Joe Phillips its Managing Director ("Mr Phillips"). Both Parties produced bundles of documents. Mr Phillips gave evidence under oath.

We were referred to the following cases:

Town and County Factors Limited v HMRC (decision 19616)

The Mayflower Theatre Trust Ltd v HMRC (decision 19254)

Preliminary matter

Mr Cannan objected to the case proceeding because the Appellant's bundle: -

had only been handed to him 20 minutes before the hearing

it contained documents which had not been disclosed to the Commissioners.

The Chairman proposed that Mr Phillips should give his evidence in chief and overruled Mr Cannan's objection to the case not proceeding on the basis that the office file showed that the Appellant's list of documents had been served on the Commissioners by Mr Phillips before Mr Greison had been instructed. The Chairman accepted that that list did not include all the matters referred to in the Appellant's bundle but he considered that those additional matters could be considered by Mr Cannan and he could seek instructions from the Commissioners. The Chairman allowed him 1½ hours to consider the matter over the lunch time break.

The Facts

We find the following facts: The Appellant operates six bookmakers' shops in the Merseyside area and is contemplating opening a seventh shop. Mr Phillips had started work at a casino in 1963 and subsequently was employed as a development officer for William Hill Organisation. He then became Managing Director of the Appellant in 1981 and bought the company in 1984. He also operates as a Licensing and Development Consultant and has recently been elected as the Vice Chairman of the Independent Bookmakers Association.

He explained that the industry had changed beyond recognition from its inception and early development when the shops were not allowed to do more than take bets. 1985 was the defining year. Thenceforth betting shops were allowed to introduce live racing and market information via satellite. The Satellite Information Service (SIS) has a monopoly for the supply of information to the betting industry. The equipment is leased from them for the various shops. The National and Irish Lotteries could then be sold through the shops and in 1996 "amusement with prizes" (slot machines "AWPs") were introduced. By 2001 the reputation of betting shops had changed to such an extent that Sir Alan Budd had recommended removing some of the regulations affecting the industry. As a result the turnover in the industry rose by between 30% and 50%. In 2003 "Fixed Odds Betting Terminals" (FOBTs) were introduced. These are electronic number machines which allow a selection of number games to be played - 49s; virtual racing; keno; football etc. The Gaming Board and the Bookmakers have approved a code whereby not more than four AWPs and FOBTs are allowed in any one shop. Further, the FOBTs must provide for a break between spins so that customers can consider whether they should continue to play or not.

The Appellant referred to excerpts from: -

William Hill monopolies and mergers report 1989

Ladbrokes and Corals monopolies and mergers report 1998

Mintel Leisure Intelligence July 2003 and 2005

Mintel the Gambler April 2006

The reports confirm the growth of the industry as set out above. At the time the reports were written, the industry had to use SIS as there was no viable alternative. Further the reports suggested that although betting would remain the core product of betting shops, AWPs and FOBTs would become increasingly important in attracting a greater number of people to visit betting shops.

The Appellant registered for VAT as a licensed bookmaker on 1 April 1997 because he had introduced AWPs into the business the revenue from which was to be treated as standard rated. The revenue from FOBTs is also standard rated. Mr Phillips explained that it was essential that the business kept ahead of its competitors. In order to achieve this all its shops (recently renamed stores) provide an hospitable and inviting atmosphere for the customers. The television screens form a back drop to advise customers not only about horse and dog racing but also show football, cricket, and golf games which facilitates their ability to make choices and bet on various outcomes. Where there is an appropriate break in the information service, commentators discuss the gaming machines and news items are shown advising on other events. SIS has recently linked up with the suppliers of the FOBTs to provide information on the screen about the machines. The Appellant has further enhanced the information on SIS by the introduction of specific information from the Coral Group. Coral expands the information already available on SIS. In addition the Appellant has recently introduced Turf TV. This sits alongside SIS and provides coverage of the prestigious racing events such as Ascot, the Derby etc. There is no doubt that SIS provides substantially more information to the customers in the shop than just racing by itself.

The shop windows display advertisements for various forms of betting, once inside the shop customers are confronted with a battery of screens and a total together of four AWPs and FOBTs. Whilst coffee and tea is not routinely provided, the staff do make it available for those customers who request it. Customers coming into the shops are attracted by the general ambiance and are encouraged to wander round. They may play on the AWPs and FOBTs in addition to making a bet. If they win on the FOBTs then the machine gives them a chitty and they queue with other customers to collect their winnings from the over the counter position. The Appellant produced a CD of the shop entrance although we did not find it particularly helpful. We are satisfied from the evidence that the screens play an integral part of the operation and provide information both as to the racing and the other facilities available to the customer. We also found that the Appellant does not provide any of the content over and above the information made available by SIS and Turf TV.

The Appellant produced an analysis of its business activities. The group figures to April 2007 showed that the OTC revenue was £4,399,998 and the FOBTs revenue was £6,367,971. The gross profit for OTC was £592,327 and for the FOBTs was £210,879, which represented 26.25% of the profit. It is clear from these figures that customers are coming into the shops to play FOBTs and are undoubtedly encouraged by the general ambiance within the shops. The London Road shop however was making a loss but Mr Phillips was unable to explain why that should be except that the OTC returns were £21,000 down for the period.

The Law

EC Council Directive 67/227/EEC ("The First VAT Directive"), at Article 2, provides that:

"On each transaction, value added tax….shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components"

EC Council Directive 2006/ 112/EC (formerly EC/77/388/EEC ("The Sixth Directive"), at Article 168 (formerly 17(2)), allows deduction by a taxable person of input tax incurred on goods or services:

"... used for the purposes of the taxable transaction of a taxable person…"

Regulation 101 of the VAT regulations deals with attributions:

"(2) In respect of each prescribed accounting period –

(a) goods imported or acquired by and… goods or services supplied to, the taxable person in the period shall be identified ,

(b) there shall be attributed to taxable supplies the whole of the input tax on such of those goods or services as are used or to be used by him exclusively in making taxable supplies,

(c) no part of the input tax on such of those goods or services as are used or to be used by him exclusively in making exempt supplies, or in carrying on any activity other than the making of taxable supplies, shall be attributable to taxable supplies, and

(d) there shall be attributable to taxable supplies such portion of the input tax on such goods or services as are used or to be used by him in making both taxable and exempt supplies as bears the same ratio to the total of such input tax as the value of taxable supplies made by him bears to the value of all supplies made by him in the period".(We are concerned with this subsection)."

HMRC policy in this regard is set out in Business Brief 19/06:

"HMRC'S policy following Town and County Factors Ltd

HMRC accept that bookmakers who add content to specialist racing TV to advertise their taxable services, may now treat the VAT as residual. HMRC remain of the view that, where no such content is added, the VAT incurred is wholly related to exempt betting and is not recoverable.

HMRC accepts that bookmakers may treat VAT incurred on Sky Sports as residual because the broadcasts are not exclusively related to exempt betting. VAT incurred on TV equipment is also residual provided it is used for broadcasts that relate to both taxable and exempt supplies. If the equipment is used wholly for specialist racing TV, then the VAT incurred is irrecoverable."

Mr Cannan and Mr Grieson agreed to provide written submissions by 22 June 2007 and to provide each other with those submissions within seven days of that date.

Summing up

The following submissions were received in writing in accordance with the directions to that effect and they are summarised here.

Jonathan Cannan submits on behalf of the Commissioners that the issue, put concisely, is whether input tax incurred by the Appellant in purchasing services from SIS for its betting shops has a sufficient direct and immediate link to its taxable supplies to justify its residual input tax for partial exemption purposes. The income from the Appellant's six betting shops is exempt from VAT pursuant to Group 4 Schedule 9 VATA 1994. Apart from its AWP and FOBT machines, the Appellant makes no other taxable supplies, for example there are no catering supplies. For the period covered by the voluntary disclosure, the only taxable supplies made by the Appellant were AWP machines. The annual adjustment in July 2006 will cover a period during which taxable supplies were made through FOBT machines. For the purposes of the voluntary disclosure the Appellant must show that there is a sufficient direct and immediate link between the expenditure on the SIS system and the machines.

Mr Cannan referred extensively to the case of The Mayflower Theatre Trust Ltd v HMRC (decision 19254) He submits that Carnwarth LJ (at para 9) went on to derive the following general principles which will be relevant to the determination of the present appeal:

(i) Input tax is directly attributable to a given output if it has a "direct and immediate link" with that output (referred to as "the BLP test" BLP Group plc v Commissioners of Customs and Excise [1995] STC 424)

(ii) That test has been formulated in different ways over the years, for example: whether the input is a "cost component of the output; or whether the input is "essential" to the particular output. Such formulations are the same in substance as the "direct and immediate link" test.

(iii) The application of the BLP test is a matter of objective analysis as to how the particular inputs are used and is not dependent upon establishing what is the ultimate aim pursued by the taxable person. It requires more than mere commercial links between transactions, or a "but for" approach.

(iv) The test is not one of identifying what is the transaction with which the input has most direct and immediate link, but whether there is a sufficiently direct and immediate link with a taxable economic activity.

(v) The test is one of mixed fact and law, and is therefore amenable to review in the higher courts, albeit the test is fact sensitive.

In Royal Agricultural College v Custom and Excise Commissioners (decision 17508 unreported) the tribunal held that the marketing expenditure attracted students to the college but did not have a direct and immediate link to the College's taxable activities, for example when students used the College Bar. In The Mayflower Theatre Trust Ltd v HMRC (decision 19254) the Court of Appeal considered the "overhead analysis". Lord Millett in Commissioners of Customs and Excise v Redrow Group PLC [1999] 1WLR 408, 416F commenting on article 17(5) said:

"These provisions entitle a taxpayer who makes both taxable and exempt supplies in the course of his business to obtain credit for an appropriate proportion of the input tax on his overheads. These are the costs of goods and services which are properly incurred in the course of his business but which cannot be linked with any goods or services supplied by the taxpayer to his customers. Audit and legal fees and the cost of the office carpet are obvious examples" (emphasis added)

It appears to be common ground that there is a direct and immediate link between the cost of the SIS system and the OTC betting. That link is plain given the inclusion of odds information and coverage essential to be able to offer OTC betting services. The existence of that link means that the Appellant cannot contend that the SIS costs is an "overhead" of the business for those purposes. Input tax incurred on SIS costs can therefore only be residual for partial exemption if it has a direct and immediate link to AWP and FOBT supplies made. From the evidence, the Appellant contends that there is a sufficient direct and immediate link. Even if the Tribunal accepts the factual basis at most it demonstrates a generalised link to other taxable supplies. There may well be a commercial link in that without SIS there would be fewer customers. That contention might satisfy a "but for" test but is insufficient for a direct and immediate link. The fact that the FOBT turnover has increased and the OTC decreased does not point to towards any link between SIS and FOBT. When a reduction in the turnover occurred at the London Road Shop Mr Phillips, when asked why there was a loss, was unable to explain the trend and did not refer to SIS when considering the increase of FOBT at that shop. There is no direct advertising by the Appellant, as in Town and County Factors Limited. The only added content is ante/post early price information provided by Coral Racing, which relates only to OTC betting. Content dealing with 49ers, and Keno are all exempt OTC betting activities.

There are significant differences between the facts of this case and Town and County Factors Limited. In that case Ladbroke added promotional information of its own and advertised their amusement machines; onward taxable supplies of SIS transmissions were sent to managers' and the judges' offices at Walthamstow Greyhound Stadium. Ladbroke also owned two racing tracks where it achieved higher prices for advertising at the track because those advertisements appeared in 2000 of their other shops.

Although the Commissioners accept the reasons for the decision in Town and County Factors Limited they do not accept the reasoning in paragraphs 15-18. The Tribunal considered the SIS system as analogous to general advertising expenditure encouraging people to enter the premises and hence forms part of the overhead cost. In view of the fact that SIS is directly linked to OTC betting it cannot be a general overhead. HMRC policy in this regard is set out in Business Brief 19/06 (see the Law above). Sky Sport coverage is residual because it does not have a direct and immediate link to any particular supply but is incurred for the benefit of the business generally (an overhead properly so called).

In The Mayflower Theatre Trust Ltd case stated that there was a sufficient direct and immediate link between the programmes and the production costs as the programme used the production to fill its pages. There was no suggestion in the case that the level of taxable sales was a relevant factor, or indeed the proportion of taxable to exempt sales. Chadwick LJ said:

"It is not enough for the Trust to assert that all the taxable supplies which it makes in the course of its business are linked, in a general sense, to its ability to stage performances of productions which it has 'bought in' under production contracts."

This is the approach the Appellant contends for in this appeal, namely a general link between the costs of the SIS and all supplies (OTC betting, FOBTs and AWPs). Looking for such a general commercial link is simply the wrong test. To hold otherwise would amount to the adoption of a "but for" test. Even if the Tribunal accepts that the SIS has the effect of increasing turnover generally there is no sufficient link to the AWP or FOBT machines. In contrast there is plainly a direct and immediate link to the exempt OTC betting.

Mr Greison submitted that the Commissioners confirmed that the Reviewing Officer had not visited the premises of the Appellant but had relied on the terms of Business Brief 17/06 (see the Law above). He acknowledged that the Commissioners interpretation of Town and County Factors Limited is wrong. It is unduly narrow and restrictive and does not reflect the business and operation of the supply of the services by SIS. The Business Brief fails to apply the facts to each case and is therefore a blanket application and interpretation. It places too much weight and significance on the addition of the content by Ladbroke. The inclusion of some minor direct advertising cannot be held or intended to be significant with regard to the provision and making of taxable supplies. The evidence shows the vital and essential nature of the television system supplied by SIS. Coral also supplied additional content. Mr Phillips gave evidence to the effect that if the televisions are not switched on the shop will be empty. The FOBTs are a significant part of the betting shop turnover and business. The screens and broadcast content can be seen and heard throughout the betting shops. The betting shop is now a leisure experience with open windows, highly visible advertising, highly visible machines, the collection of winnings undertaken by a token passed through the main counter used by the betting public. SIS also promotes FOBT machines and random numbers betting which is a stimulus for the use and facility of the machines in the betting office. Without SIS customers would migrate elsewhere. SIS broadcasts also include commentary, discussion and sporting information. Evidence was heard that competitor shops that did not have additional services e.g. Turf TV were less busy than the Appellant. This provides a direct link between the provision of TV broadcasts and TV services and the taxable to the customer through the playing of FOBTs.

The Test to be applied is now referred to as the BLP test which test was summarised in Town and County Factors Limited as follows: Input tax is directly attributable to a given output tax if it has a "direct and immediate link" with that output. The application of the BLP Test is a matter of objective analysis as to how particular inputs are used and is not dependant upon establishing what is the ultimate aim pursued by the taxable person. It requires more than mere commercial links between transactions, or a "but for" approach. The test is not one of identifying what was the transaction with which the input has the most direct and immediate link, but whether there is a sufficient direct and immediate link with a taxable economic activity. The use to which the inputs are put by the trader is the relevant consideration. Town and County Factors Limited states "No doubt the SIS information is used internally as a means of knowing who has won a bet", but we are more concerned with the different use, that of the Appellant making the information available on screens to the public who enter the licensed betting offices. It is clear from the facts that the Appellant uses all the SIS information together with the added content by Coral (and in any event with or without the Coral content) that the use is for each and every one of the customers who frequent the licensed betting offices. Access to the use of those facilities is not, cannot be and would not be restricted. Those who use the AWPs and FOBTs have the facility provided to them of the SIS screens, information, commentary, discussion and access to numerous pages of content which form the content of and attraction of the betting office. It is submitted that the SIS facility cannot be and is not exclusively for OTC betting and has an immediate essential and direct link with the making of the taxable supplies. Neither Town and County Factors Limited nor The Mayflower Theatre Trust Ltd advanced any concept of making content critical and essential in determining the direct and immediate link. It is submitted that on the facts of the case and the evidence heard the Appellants are entitled to succeed in the appeal.

The decision

We have considered all the facts and the law and have decided that there is a direct and immediate link between the provision of SIS and the OTC betting, the AWP and FOBT machines. We agree with Mr Greison that although the case of Town and County Factors Limited referred in its facts to the content provided by the Appellant the decision itself does not indicate that that was an essential part of the direct and immediate link. In that regard we also agree that the Business Brief is incorrect.

As Carnwarth LJ stated in The Mayflower Theatre Trust Ltd (at paragraph 9):

"The application of the BLP Test is a matter of objective analysis as to how the particular inputs are used and is not dependent upon establishing what was the ultimate aim pursued by the taxable person. It does, however, require more than mere commercial links between the transactions, or a "but for" approach. The test is not one of identifying what is the transaction with which the input has most direct and immediate link, but whether there is a sufficient direct and immediate link with a taxable economic activity".

We do not agree with Mr Cannan's proposition that because there is a direct and immediate link between SIS and the OTC service, there cannot be a, perhaps different, direct and immediate link with the FOBT supplies. [As Dr John F Avery-Jones states in Town and County Factors Limited:

"We should explain why we have rejected some of the arguments put forward by Mr Thomas. He makes a distinction between an input either having a direct and immediate link to particular supplies, or not having an immediate link to any specific supply and thus being a general overhead, so that if there is such a link to OTC betting it cannot be an overhead. We consider that there is no real distinction between the two cases. The inputs have a direct and immediate link to all supplies made from the LBO, and so they are a general overhead".

The position is no different in this appeal. We consider that SIS may well, in the early days, have only dealt with horse and dog racing. However, it is clear from the evidence that it is now much more sophisticated. Had the Reviewing Officer visited any of the shops, and not relied solely on the written report from Mrs Wharton, he would have seen, as we did in the CD footage, that the TV screens form an integral back-drop in the shops. We were told by Mr Phillips that the screens were turned on first thing in the morning and presumably run for the rest of the day, providing an atmosphere which attracts customers to frequent the shops. The content of the programmes is relevant in spite of Mr Grieson's comment to the contrary. The Commissioners concurred when they prepared the Business brief. They appear to have relied heavily on the personalisation of the input by Ladbrokes. The evidence in that case indicates that two televisions carried that information out of a bank of eight, with 14 individual broadcasters working the system. Given that there are 2000 shops with similar banks of television sets, and that Ladbroke are a substantial organisation, it is clearly in their interest to add content. We think it is probably in the Appellant's interest to do likewise if it could afford the costs involved. We do not accept, however, that the failure to provide content is critical to the direct and immediate link. What we do think is critical is that the content should be relevant to the services being supplied by the Appellant. We would have some sympathy with Mr Cannan's proposition if the supply was of horse racing and dog racing alone. That is clearly not the case. SIS has moved on from that position and now provides a comprehensive coverage of sporting and gaming activities.

The BLP Test is an objective analysis as to how the particular inputs are used. As Dr John F Avery –Jones states in Town and County Factors Limited:

"The use by the Appellant is to make the screens available to any member of the public who enters its LBOs whether or not they bet. The Appellant does not, and could not, restrict access to its LBOs to those who intend to place bets… making screens available to those entering its LBOs is in our view analogues to a trader giving free samples as a means of advertising. The trader hopes that the recipient will be persuaded to buy the product, but it has to accept that the sample will be used and enjoyed by some people who have no intention of buying the product. The Appellant uses the inputs not only for taking OTC bets but to advertise the LBOs by making these and other facilities available to those visiting them in the hope that the public will visit LBOs or stay in them longer and purchase any supplies that are available to them".

The position is identical in this appeal. We have decided that there is a direct and immediate link between SIS and the AWPOs and FOBTs. Mr Cannan submits that if the Tribunal allows the appeal an issue will remain for consideration by the parties as to whether the standard method of attributing the residual input tax provides a fair and reasonable attribution. That is a matter we leave to the parties to consider and discuss as we have not been addressed on the same. It is hoped that the parties can agree how the residual input is to be dealt with. If they cannot then they have leave to apply to the tribunal again for a decision.

For all the above reasons we allow the Appellant' appeal and direct that the Appellant's costs of, incidental to, and consequent upon the appeal to be assessed in default of agreement by a Taxing Master of the Supreme Court of Justice in England and Wales by way of detailed assessment on the standard basis.

DAVID S PORTER

CHAIRMAN
Release Date: 6 August 2007

MAN/06/0839